Tetra Tech (TTEK) Q3 FY26 earnings call: guidance and Q&A

Tetra Tech reported a significant increase in backlog, up $208 million or 5% sequentially, reaching just under $4.5 billion. This marks the second consecutive quarter of growth, providing strong visibility for future performance. The company emphasizes a conservative approach, including only contracted, funded, and authorized work. Key wins contributing to this growth include nearly $300 million in contract capacity from the Army Corps of Engineers and a lead designer role for the largest dedicated municipal PFAS treatment system in the U.S. in Dayton, Ohio. Commercial orders were also strong, driven by digital automation for data centers and sediment restoration programs.

The company is seeing increased investment in water-related priorities across its key regions, leveraging its expertise in high-end water treatment, quality management, hydropower, digital systems, and cybersecurity. In the U.S., over 500 municipal clients are planning modernization and expansion, integrating rate increases and bonds. The U.K.'s AMP cycle supports growth with approximately GBP 105 billion in water sector investment through 2030, where Tetra Tech holds over GBP 2 billion in contract capacity. Canada is seeing federal infrastructure and hydropower investments, including Hydro-Quebec's plan to add 11 gigawatts of new capacity. Australia is accelerating digital automation and cybersecurity in water, with market forecasts estimating over $17 billion in digital water investments over the next decade.

Tetra Tech views Artificial Intelligence as a powerful enabler for its technical experts, rather than a disruptive threat. The company specializes in front-end applied science, technical, and engineering work that requires site-specific knowledge, regulatory understanding, and bespoke solutions for complex problems. AI is seen as a tool to help technical experts evaluate more alternatives, assess larger data sets, and develop better solutions for clients, ultimately leading to market share growth and margin expansion on fixed-price projects. This approach differentiates Tetra Tech from downstream commodity design companies.

The U.S. federal government market continues to face challenges, primarily due to a constrained contracting office staff pool that creates bottlenecks in issuing task orders, despite an approved budget. In the U.S. commercial sector, while energy, transmission, mining, and data center revenues are increasing, these gains are partially offset by a decline in renewable energy work, specifically the cancellation of offshore wind programs. Additionally, general uncertainty around the U.S. administration and geopolitical issues contributes to client caution in awarding new programs, though Tetra Tech has secured strong commercial orders despite these headwinds.

Tetra Tech has demonstrated consistent EBITDA margin expansion, with an 80 basis point improvement for the first nine months of FY26 compared to FY25. This performance is attributed to the company's focus on high-end technical design and engineering for water and environmental projects, which carry higher margins. Management reiterated its long-term strategic goal of improving EBITDA margins by 50 basis points annually, noting that while some years may see higher expansion (like the 70 bps guided for FY26), this remains a sustainable average target. The company's EBITDA margin on a net service revenue (NSR) basis would be approximately 240 basis points higher year-to-date.